Reference no: EM132535499

Pile 'em High, Sell 'em Cheap, a retail firm, is making a decision on how much it should payout to its shareholders. It has $100 million in investable funds. The firm has 100 million shares outstanding, selling for $15 per share. The beta of the stock is 1.25 and the risk-free rate is 8%. The expected return on the market is 16%. Currently the firm has $500 million of debt outstanding, with a marginal yield of 12%. The corporate tax rate is 50%. Assume the firm will finance any investments at its current debt ratio and has the following projects available:

Project Investment After-tax return on

($ millions) capital (%)

A 15 27

B 10 20

C 25 16

D 20 14

E 30 12

-Based on this information, what is the company's projected capital expenditure next year (i.e. which of the five projects would you accept and why)?

-Assuming the firm accepts your investment recommendation, what is the maximum amount that the company will have available to pay out as dividends next year?

- Would you pay out this maximum amount as dividends? Why or why not?